This is one of my favorite parables, highlighting the nature of our income tax system and debates about who should pay.
The late economist Milton Friedman’s nearby quote is right on, noting the key to tax law is convincing the public that someone else will pay and not them.
It seems timely as we close the books on 2025 and begin dreading tax preparation.
Here’s the story: Suppose 10 men meet for lunch, and the bill comes to $100. They decide to split the bill the way tax law divides the national tax burden, inspired by how the United States —and many countries — structure progressive income taxes.
The Initial Split
- The first four men (the poorest) pay nothing.
- The fifth man pays $1.
- The sixth pays $3.
- The seventh pays $7.
- The eighth pays $12.
- The ninth pays $18.
- The 10th (the richest) pays $59.
So, the richer you are, the higher your share; the poorest pay nothing. The idea is that the wealthier you are, the more you can afford. Seems reasonable.
When the Bill Gets Cheaper
But one day, the restaurant owner says, “You’re valued customers! Here’s a $20 discount, so now lunch is just $80.”
They still want to divide the bill the same tax-like way. The poorest four men continue to pay nothing. But for the other six, if they divided the $20 discount evenly ($3.33 each), the fifth and sixth men would be “paid” to have lunch, as their share would go negative.
To solve this, the restaurant owner proposes proportionate reductions based on what each previously paid. Here’s what each ends up paying:
- First four men: $0 (still free).
- Fifth: $0
- Sixth: $2
- Seventh: $5
- Eighth: $9
- Ninth: $14
- 10th: $50
What Happens Next
Outside, the group reflects on the windfall: The sixth man points out he only saved $1, while the 10th man saved $9.
The group complains: “Why should the richest guy get the biggest benefit?” A fight erupts and the 10th man gets beat up so he quits the lunch group.
“Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.”
milton friedman
That leaves the other nine men having to cover the $80 lunch bill — an average of about $9 each.
The four poor men were still unable to pay for lunch, leaving the $80 bill to be paid by the other five at an average of $16 — an increased cost for each man.
More contentious discussions about how that should be split follow about who should pay what.
Conclusion
This story is meant to highlight that, in a progressive system, tax cuts may help all taxpayers but usually benefit high contributors the most in raw dollar terms.
But they continue to pay more than everyone else. And it highlights the challenges if higher income taxpayers decide to “quit the group” by moving out of high tax rate cities, states and even countries.
This has long been the case (rock stars left England to avoid a 95% top income tax rate in the 1960s) — technology and wealth of high rate taxpayers have made it easier to change domiciles these days.
We are seeing this as “the rich” move from high tax states like California and New York to places like Texas and Florida.
The concept of progressive income taxes is sensible and arguably reasonable, but there’s also too much of a good thing.
So, let’s be careful about what we ask and vote for. We just might get it and be left holding the bag!